Time for Digital Lenders to Reassess the Model and Become More Prudent
With the advent of COVID-19 crisis, the whole world economy is facing an unforeseen downturn. With India going into lockdown in different phases, every sector has been affected. While sectors like manufacturing, hospitality, and travel took the heaviest toll, no other sector was insulated either from this once-in-a-lifetime catastrophe. Technology-related sectors have been able to manage at their end to some extent by working remotely. Amongst all of these, the financial sector has been impacted hugely due to other reasons.
While the sector was trying to cope up with problems that arose due to the IL&FS crisis, the shutdown in the country just added to the woes. On top of it, the declaration of 3 months’ loan moratorium by RBI and a further extension by 3 more months has introduced new variables. This may impact credit discipline in the short to medium term, and the NBFCs will struggle to maintain liquidity or asset-liability mismatch. Challenges will be more for companies which are into digital lending, and serving customers who are mostly not being catered to by the banks, more than half of whom don’t have any credit history.
In many cases, the banks have not extended the moratorium to the NBFCs. Hence, while most of the customers will avail the option of the moratorium, the NBFC lenders will start feeling the pinch of liquidity. This would lead to the NBFCs paying the banks from its cash reserves, in the lack of which they are likely to default. This, in effect, will lead to their downgrade making it difficult to raise further funds. Also, the aberration in the payment behaviour is likely to increase the delinquency and default rates manifold, and the net worth of these NBFCs is expected to get eroded, which would again lead to further downgrades. Liquidity, or the lack of it will be the biggest monkey in the back for all these lenders.
In the changed scenario, the lenders will have to rethink their strategies and must reassess their processes. Most of them will relook into their underwriting methodologies and employ stricter conditions while allowing any new customers into their network. The existing customers will be re-evaluated to set up their creditworthiness, mostly on the basis of new parameters based on their location, current employment status and sector they are employed in, among others. Alternate data sources and AI-ML will be used widely to make sound judgement about the customers. Similarly, different collections processes will need a revisit to be efficient in the post COVID era. Physical collections will give way to innovative collection methods where robotics and automation will be used at the forefront. Net net, lenders will move to methods which can be scaled faster and be less manpower intensive.
Disbursement wise, the lenders will look to diversify their portfolio to include loan products like gold loan or securities-backed loan that can provide better guarantee of payment. Keeping in mind the financial constraints that would be imposed on the borrowers due to partial loss in income, the credit lines and tenures will need to be revisited. The lenders are expected to provide additional benefits or services to their better customers to ensure their stickiness.
The current period is going to be a tough time for digital lenders in terms of resuming usual business as well as collection of cash already lent in the market. The players who ensure that they survive this period with minimal damages will come out stronger as potential market leaders over the next few years.
